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I.M.F. Calls for Overhaul of Financial System

FRANKFURT — The International Monetary Fund said Wednesday that “the global economy has turned a corner” after the harrowing start to 2009, but that only a thorough restructuring of the financial system could prevent a return to crisis and pave the way for solid growth within the next 18 months.

However, the I.M.F. did say that its estimate of total writedowns at banks and other financial institutions had declined by $600 billion, from $4 trillion six months ago to $3.4 trillion today, in part because the value of complex securities at the heart of the crisis has stabilized.

In its Global Financial Stability Report, an assessment that has brought widespread praise from economists as a thorough analysis of the system’s health, the I.M.F. praised the mixture of bank rescue and stimulus packages. But it said the policies had not changed the fundamental dynamic by which debt-burdened banks and consumers present a drag on economic growth.

“The risk of a reintensification of the adverse feedback loop between the real and financial sectors remains significant as long as banks remain under strain and households and financial institutions need to reduce leverage,” the I.M.F. wrote in the report.

To head off a new chapter in the crisis, the I.M.F. called on governments to adopt regulations to strengthen bank capital and establish effective policies to clear bad loans off bank balance sheets. It also called for “great care” in winding down crisis-driven rescue policies to avoid bringing on a new crisis.

Broadly speaking, the I.M.F. said, the global economy still suffered from a shortage of credit, thanks to the crisis at the heart of the Western financial system, which stemmed initially from huge losses linked to the U.S. mortgage market. Now, loan write-offs linked to a grinding recession are amplifying the problem.

“When set against projected demand for credit by the public and private sectors,” the I.M.F. wrote, it appears that forecast supply could “fall short of even anemic private sector demand.” Having shouldered losses of $1.3 trillion to date, the I.M.F. estimated, banks will still have to write off $1.5 trillion in bad loans or worthless securities by the end of 2010. It added that U.S. banks were about 60 percent through the process of writing off bad investments. European banks, because the economic cycle in Europe lags behind that of the United States, are about 40 percent finished, it said.

Even though banks are returning to profitability, the I.M.F. said, incoming cash will not be enough to compensate for the losses. So, it said, banks will still need new capital infusions, obtained either by raising it in private markets or by tapping government bailout plans.

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The I.M.F. painted a marginally flattering picture of U.S. policies toward the banking system, saying that “stress tests” and subsequent capital-raising by big banks had helped stabilize the system.

It estimated that banks in the 16-nation euro zone still needed to raise $380 billion to put their Tier 1 capital ratio, a measure of bank reserves, at 10 percent. U.S. banks, by contrast, would need about $80 billion.

The I.M.F. criticized the pace of efforts on both sides of the Atlantic to clear bank balance sheets of bad assets. In the United States, a system by which private investors buy bad assets at a discount with government-backed loans has yet to attract any takers, while European programs are either incomplete or inadequate, the fund said.